Consumers who use debt settlement companies are often instructed to stop paying debtors as part of a negotiation strategy. In the meantime, they are told to make payments to a third-party firm, allegedly to build a pile of cash that can be used to make settlement offers. With fraudulent firms, consumers have complained that debts ultimately aren’t settled, and the funds they’ve paid to the third-party firms are lost to fees.

Meracord, the CFPB said, collected “millions of dollars” in such funds on behalf of debt settlement companies from 11,000 consumers since October 2010. Nearly 5,000 of those customers got nothing for their money — none of their debts were actually settled, the agency alleges.

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“Debt-settlement companies have been a particular concern in the wake of the recent financial crisis. Millions of people have experienced deep financial problems after losing their jobs and much of their savings,” said Steve Antonakes, Deputy Director of the Consumer Financial Protection Bureau. “Many of these consumers were targeted – and taken advantage of – by debt-settlement companies promising to help them get out of debt.”

The CFPB has asked a federal court to force the firm to pay a $1.4 million civil penalty, and to stop collecting upfront fees for settlement firms.

“Pursuing this action against Meracord as a centralized chokepoint represents an effective and efficient strategy for the Bureau that allows us to protect consumers who are being charged illegal fees by a broad array of debt-settlement companies that rely on Meracord’s services,” Antonakes said.

In a statement, Meracord noted that it announced plans to cease offering third-party payment processing for any debt relief companies in January and finished its wind-down in July of this year.

“The settlement does not include any findings of wrongdoing or determinations that Meracord violated any law. Meracord regrets consumer harm resulting from certain activities of the debt relief industry. Our focus has always been on protecting consumers to the best of our ability, leading to our voluntarily exit of these business lines in January of this year. We are pleased to have this matter behind us so we can focus our resources on providing compliant payment services in other markets.,” a spokesperson said via email.

The bureau’s announcement does note that “the complaint is not a finding or ruling that the defendants have actually violated the law. The proposed court order has been filed with the United States District Court for the Western District of Washington and will have the full force of law only when signed by the presiding judge.”

The CFPB has filed a steady stream of cases against debt settlement firms in the past year: actions against Payday Loan Debt Solution and American Debt Settlement Solutions, both resolved with consent orders; and complaints filed against Mission Settlement Agency, the Law Office of Michael Levitis, Premier Consulting Group, LLC, and the Law Office of Michael Lupolover.

“For consumers, dealing with debt-settlement companies can be risky. Some promise more than they can deliver. They can charge expensive fees,” Antonakes warned. “They sometimes claim that a consumer can erase their debt for pennies on the dollar, when, in many cases, they cannot. Although Meracord itself is not a debt-settlement company, we believe that it directly facilitated illegal conduct on the part of debt-settlement companies by processing illegal upfront fees.”

Image: Ingram Publishing

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Bob Sullivan is author of the New York Times best-sellers Gotcha Capitalism and Stop Getting Ripped Off. His stories have appeared in The New York Times, the Wall Street Journal, and hundreds of other publications. He has appeared as a consumer advocate and technology expert numerous times on NBC's TODAY show, NBC Nightly News, CNBC, NPR's Marketplace, Terry Gross' Fresh Air, and various other radio and TV outlets. He helped start MSNBC.com and wrote there for nearly 20 years, most of it penning the consumer advocacy column The Red Tape Chronicles. See more at www.bobsullivan.net. Follow Bob Sullivan on Facebook or Twitter. More by Bob Sullivan

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